When you're trying to understand the concept of snowball debt reduction, think about how a snowball develops when it is rolled through the snow. It starts off small, and as it goes along it gets bigger and bigger until the goal is reached. When you use the debt snowballing method, you're paying off your smallest balances first, then moving onto the bigger problems.
Interest Rates Don't Matter
Some credit card experts say that you should pay off your highest interest rate balances first and then work your way down. The snowball method says the opposite. When you use the snowball debt reduction method, interest rates are not the main concern. This is one rare case when interest rates are not the top priority.
Smallest to Largest
Next, you have to order your debt from the smallest balance to the highest. The snowball method says that you start off by paying off the lowest balances. This is to help you make progress and eliminate the minor annoyances so that you can focus on the bigger problem.
The only case where you should choose a higher interest rate balance as a priority is if the balance is close to that of another loan or credit card that has a lower rate. For example, if one card has a $500 balance at 15 percent interest, and the other has $550 at 10 percent interest, prioritize the $550 balance.
Minimum Payment
The next step to snowballing your debt reduction is to figure out the minimum payment for each of your debts. You will continue to pay that amount for each credit or loan other than the smallest balance at the time. You will dedicate all of your extra cash to the smallest balance (on top of the minimum payments).
Extra Cash
Next, you have to determine how much extra money you have left over each month to dedicate to your debt payoff strategy. Instead of saving the extra money or spending it on frivolities, you will be putting it toward paying off your debt. If you don't have extra income, you will have to make sacrifices each month, such as giving up your daily coffee habit or reducing your entertainment budget to make this strategy work.
Continuation
After you finish paying off your smallest balance, you will eliminate it from your memory, and then start dedicating all of your extra cash to the next debt balance in line. Continue this process until all of the debt is paid off.
It is important to cut up all of your credit cards before implementing this snowball debt reduction method. If you are still using the cards and accruing new debt, this strategy can't work in the long run.
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